Outlook For 2013

So Dow made new highs despite all the fundamentally negative views and bear cries all over the place. As mentioned on Nifty Paradox as well, a corrective move downwards is expected soon on all indices and we should be able to see that commencing in May/June 2013.

What will be the quantum of fall - that remains to be seen but definitely at a minimum, a retest of 10400 levels that was seen in October '11. At that time, the market was almost 80% + Bears and the ticker is showing exactly what is contrary to the consensus view. Now we are looking at 90%+ Bulls and in all likelihood the ticker will take the contrarian view IMHO

So those who were invested, its time to book profits and certainly not the time to buy; if one keeps looking at the fundamentals, it will be missing the whole point. As Nadeem Walayat rightly says, as long as quantitative easing and money printing keeps taking place in any form, markets will have a strong tendency to  move up due to induced liquidity.

Should one prefer to hold the longs or create new longs now [the overall uptrend is almost 4.5 years old now  and history suggests that 4.5 to 5 year rallies are followed by short 13-21 month corrections before starting the next leg up] one should hedge longs with 13800 Puts [3 months to 6 months forward] that are literally going by nickels and dimes on the dollar right now. 1 Long Contract would need at least 3 such Puts to hedge the risk of the portfolio.

Waiting for the 'Sell in May' syndrome to kick in.....................

Update 15th March 2012

13200 came in first on DJIA; Dow Theory non-confirmation in place via negative divergence through Transports [both sea and rail freight rates are major contributors] Nevertheless, a topping process is in place now; by end-May 2012, we are very likely to see 12k on DJIA [going below is doubtful with so much liquidity by central bankers] Only a weekly close below 11800 can signal further weakness;

Shorts/Puts seem to be on the reward side with minimal risks [take 3 month forward contracts to be safe]; safe traders can now start building short positions and no hedge per say is required except for adequate margin in trading account to hold the short positions. Do not exercise leverage at this point of time; unilateral bears have already lost twice within 5 weeks, trying to catch a top and taking short positions with maximum leverage [once with SL @ SnP 1360 and then with SL @ SnP 1400!]

On the other hand there are bull calls for 14k, 15k etc which seems highly improbable in the next 6 to 8 weeks; will repeat the same thing that I keep repeating on Nifty on a daily basis; trade little - trade healthy; its time to book profits on calls/longs [long calls with far lower strike prices recommended on 31st Jan]

Update - 31st January 2012

No change to the outlook except for the fact that the upisde went far beyond expected levels of 12600 on DJIA and well above 1300 on SnP 500. Whilst some bears are jumping to short this market, IMHO it is better to wait for a few more days for complete confirmation of the downtrend [that is eventually expected]

Shorts via March futures created now on DJIA must be hedged with March 12700 Call in the ratio 1:1 or 12800 Call with ratio 1:2 IMHO

For SnP 500, shorts via March futures must be hedged with the March 1310 Call in the ratio 1:1 or 1320 Call in the ratio 1:2. IMHO

If the downturn does occur as expected, then bears could be looking for targets anywhere between 11800 and 12200 in 3 to 5 weeks time, making losses on the calls worth ignoring; if bulls do spring in a surprise, the calls will insure the losses on the futures section.

Next Update: After a weekly close below 12200.......OR 13200 on Dow spot whichever is earlier!!!

Update - 17th January 2012

Seems like the final topping out process is in place. The divergence is evident between Dow and SnP 500 right now. Previous 2 sessions took on 12450 on Dow and 1300 posed a challenge on SnP500.

Today Dow almost took out 12550 [may try for 12600] but SnP is still struggling to take out 1300 [a reflection of poor market breadth IMHO]. Any further uspide will be a boon for bulls whilst bears need to be patient.

No change to outlook; first sign of weakness with a weekly close below 12200; complete weakness to be confirmed only after 2 consecutive closes below 11500 and then bulls can say good bye to 12k levels for a long time to come.

[Please note that the market capitalization is significantly lower even though the indices are just about 5% to 8% lower than the May 2011 highs!]

Update - 3rd January 2012

Happy New Year 2012 to all Dow enthusiasts. Santa Rally did not come through but New Year's trade brought in the much awaited cheer and targets have been achieved as indicated in the previous update. Some more steam possible for another 150 odd points but wouldn't bet too much on it.

By and large, the top seems to be in place and prices should be able to start declining slowly but surely. For those who are long, some profit booking advised with trailing stop loss on marginal holdings.

A weekly close below 12200 will be the first sign that this was a relief rally as expected. As indicated in Dec 2011, full weakness to be confirmed only after 2 consecutive closes below 11500 and then it is adios to higher levels for a long time.

[Dow never leaves any gaps open for a long time on either side of price action unlike emerging markets!]

Update - 17th December 2011

11800 maintained on weekly closing basis; to the extent we don't get 2 consecutive closes below 11500, 12400 is still open. Dow's Santa will spring a surprise before getting burnt as an old man for 2012;

Get out of ETFs asap; don't let your hard earned bucks go into pork bellies!

Outlook for December 2011 - 5th December 2011

No change in outlook; Dow seems set to retest the 12200-12400 levels before making the next turn lower;
Shorts should not rush so soon and the ideal strategy would be to open the first set of shorts as close to 12400 [12440 to be precise as per my charts] as possible with the Jan 12500 Call as a hedge [1:2 ratio recommended] and the next short after a close below 12k levels [Safe traders can wait for volume and momentum to convincingly breach 11800 levels and go full throttle here]

IMHO, the maximum upside we can have from here with all the good news and Santa Rally is capped at 12600 [12580 to be precise as per my charts]. It is very likely that we will see sub 11800 levels prior to Dec expiry and then come back for a retest of 12000-12200 once again [yes lots of volatility floating around]

Once we get 3 consecutive closes below 11400 [expected closer to January '12 series expiry], bulls on Dow can say a full and final good-bye to 12k levels for a long time to come IMHO

[Corresponding upside levels on SnP are 1280-1300 levels and downside targets for SnP are 1180, 1150 and expect to see all these resistances and supports in the 8 weeks to follow from today]